PetroChina Sees Chance for Mergers, Acquisitions

THE WALL STREET JOURNAL

MAY 12, 2009, 7:59 A.M. ET

By SHAI OSTER

BEIJING — PetroChina Co., China’s biggest oil company, expects China’s slumping prices will help it rein in costs and sees the global economic downturn as an opportunity for overseas mergers and acquisitions.

Company executives said they are in talks with international oil majors including Anglo-Dutch Royal Dutch Shell PLC, Britain’s BP PLC and U.S. major Chevron Corp., along with state-owned oil giants in Qatar and Venezuela. Shell, BP and Chevron declined comment on specific deals.

“Overseas M&A is always a key point for PetroChina’s strategic development, and under the current financial crisis with low oil prices, it’s a very good opportunity,” President Zhou Jiping said on the sidelines of the company’s annual general meeting. He said the company is “very actively” looking at overseas projects, “including enhancing our cooperation with the state oil companies of some key resources countries, such as Kazakhstan, Venezuela, and even Qatar.”

Depressed oil prices and the global credit crises have left smaller oil companies scrambling for cash. Even PetroChina, which has managed to outperform some of its international peers, saw net profit erode 22% last year, the first fall for the company since 2001. Oil production fell 5.7% in the first quarter compared with a year earlier, as the company cut production to match weaker demand and higher inventories.

That global weakness has opened an opportunity for Chinese natural-resource companies, which still have access to financing from the robust Chinese banking sector. And China is already starting to see a rebound in demand amid signs of economic recovery, Mr. Zhou said.

PetroChina’s state-owned parent company, China National Petroleum Corp., recently bought Kazakh oil producer MangistauMunaiGas in partnership with Kazakhstan’s state-owned KazMunaiGas for $3.3 billion, part of an ongoing push into Central Asia that is challenging Russia’s dominance in the region while opening up new routes for oil and natural gas to China and wider Pacific markets.

PetroChina Chairman Jiang Jiemin said a 100,000 barrel-a-day China-Kazakhstan crude oil pipeline will be operational by the fall. And the company is developing plans for another pipeline to carry natural gas from Central Asia all the way to Hong Kong. That pipeline would free the natural-resource-rich Central Asian republics from dependence on Russia’s network of pipes to carry their gas to Europe and open up markets in China and the Pacific.

Mr. Jiang said PetroChina is also pushing ahead in Venezuela. Agreements there could eventually bring in some 40 million metric tons of oil, or about 800,000 barrels a day, once two joint-venture refineries to handle Venezuela’s extra-thick crude oil, including one in southern China’s Guangdong province, are finished. Company executives did not provide further details on the investments.

PetroChina’s expansion is in contrast to the strategy at China’s main offshore oil producer Cnooc Ltd. In March, Chairman and Chief Executive Fu Chengyu said that falling oil prices made M&A too risky.

Still, PetroChina is facing pressure to rein in costs. Mr. Zhou said PetroChina would aim to reduce capital expenditure by 10% and reduce operating costs by 5%, without revealing any exact figures. In April, the company said capex spending would be 232.2 billion yuan, or about $34 billion at current exchange rates. Company executives said that China’s slumping prices would allow the company to save money. Savings would be reinvested into expanding production.

On Tuesday, shareholders approved plans to issue bonds worth up to 100 billion yuan, or $14.81 billion, to pay for capital expenditure. The company didn’t say when the bonds will be issued. Earlier, executives had said they would need a total of 150 billion yuan to finance production and investment this year.

Shares of PetroChina, the world’s second-most valuable oil and gas company after Exxon Mobil Corp., have been rising along with rebounding oil prices and optimism around China’s stimulus package.

But analysts remain concerned about lack of transparency in China’s fuel pricing policy after an 11th-hour reversal on a widely expected fuel-price hike late last week.

—–Wan Xu contributed to this article.Write to Shai Oster at [email protected]

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